Summary

At Breakpoint 2023, Joe Corey shared valuable insights into the potential of Automated Market Makers (AMMs) when combined with the computational power of the Solana blockchain. By highlighting the limitations of current AMMs, Corey presents an opportunity to reimagine market making through the lens of two innovative mechanisms: power function market makers and interconnected markets. His talk showcases how these mechanisms can enhance capital efficiency and risk management within AMMs. Additionally, Corey introduces the Tachyon Math library, a tool designed to vastly reduce computational costs in Solana transactions, which serves as a bridge enabling these advanced market making concepts.

Key Points:

Traditional vs. Next-Generation Market Making

Corey explains that traditional constant function AMMs, while simple and efficient for bootstrapping new markets on lower throughput chains, are hampered by impermanent loss and lack of capital efficiency. Next-generation AMMs on Solana, however, could utilize power function market making, which allows for liquidity concentration adjustments to better reflect market conditions and optimize gains for liquidity providers and traders. Although more complex to implement due to demanding computational requirements, the Tachyon Math library mitigates this obstacle by lowering costs via pre-calculated values and interpolation.

Interconnected Markets and Efficiency

With the vision of reducing impermanent loss and arbitrage opportunities, interconnected markets signify a new paradigm where separate AMM pools can communicate to align prices. This mechanism leverages on-chain data and avoids the inefficiency of isolated pools that become vulnerable to arbitrage due to outdated pricing. The introduction of a mechanism where these interconnected prices can inform and condition each pool could greatly enhance the competitiveness and fairness of AMMs on Solana.

Facts + Figures

• Solana's blockchain offers low-cost, high-throughput capabilities not available on all chains, enabling more complex AMM designs.
• The new power function market making mechanism on Solana allows for adjustable liquidity concentration, which optimizes capital efficiency.
• Implementing complex power functions typically consumes substantial gas, with simple functions taking up to 10% of compute in a single transaction.
• The Tachyon Math library introduced by Corey can reduce computational costs on Solana by approximately 10 times.
• Using Tachyon Math, the calculation of complex equations becomes feasible on-chain, as it uses pre-calculated values and interpolation.
• Interconnected markets offer a solution to the impermanent loss by using shared price information across AMM pools to discourage inefficient arbitrage trades.
• Traditional market making is a latency game, whereas AMMs deal with impermanent loss, both of which can be mitigated through dynamic interconnected markets.
• Solana’s ability to quickly scan and average prices from various pools lends itself uniquely to the interconnected market mechanism proposed by Corey.

Top quotes

• "So the cheap compute on Solana really cracked open the design space for AMM mechanisms."
• "The guiding principle here is to create protocols that benefit users."
• "By adjusting a parameter, you can affect the concentration of liquidity near the market price."
• "Newton's method is one way of doing that, but depending on your specific market making equation, you can get it much more optimized."
• "A single logarithmic function takes up 10% of the compute available in a Solana transaction."
• "We want to avoid arbitrage if we're market making."
• "[Interconnected markets] could greatly enhance the competitiveness and fairness of AMMs on Solana."

Questions Answered

What are AMMs and why are they important in blockchain?

Automated Market Makers (AMMs) are protocols that allow digital assets to be traded in an automated manner without needing a traditional buyer and seller to agree on a price. They are pivotal in decentralized finance (DeFi) as they enable liquidity and trades to happen seamlessly, contributing to the overall efficiency and vitality of the cryptocurrency markets.

Why does Solana's blockchain technology matter for the evolution of AMMs?

Solana's blockchain offers high-speed and low-cost transactions. This allows for the development and implementation of more complex and computationally intensive AMM designs without incurring prohibitive costs or performance issues. It creates space for innovation in market making that isn't possible on other more congested or expensive blockchains.

What is impermanent loss, and how do new AMM designs aim to address this?

Impermanent loss occurs when the price of tokens in an AMM pool changes compared to when they were deposited, potentially leading to a loss when providers withdraw their liquidity. New AMM designs aim to minimize this risk by improving capital efficiency and allowing the liquidity to adjust based on market conditions. Interconnected markets and smart use of on-chain data can help prevent such losses by keeping the prices in the pools more aligned with the actual market prices.

How does the Tachyon Math library improve Solana’s AMM mechanisms?

The Tachyon Math library significantly reduces the compute cost required for complex mathematical functions necessary in advanced AMM mechanisms. By doing so, it enables the use of sophisticated equations in market making that would otherwise be too expensive to run on-chain due to high gas fees.

Why might interconnected markets be a game-changer for automated market making?

Interconnected markets facilitate information sharing between different pools, allowing them to update their prices in response to changes in the wider market quickly. This reduces the chance for arbitrage, which occurs when traders exploit price differences between markets to make a profit, causing liquidity providers to potentially incur losses. This strategy could result in more stable markets and fairer outcomes for both liquidity providers and traders.